Do Peer Firms Affect Corporate Financial Policy?

ABSTRACT

We show that peer firms play an important role in determining corporate capital structures and financial policies. In large
part, firms' financing decisions are responses to the financing decisions and, to a lesser extent, the characteristics of
peer firms. These peer effects are more important for capital structure determination than most previously identified determinants.
Furthermore, smaller, less successful firms are highly sensitive to their larger, more successful peers, but not vice versa.
We also quantify the externalities generated by peer effects, which can amplify the impact of changes in exogenous determinants
on leverage by over 70%.